There is perhaps no greater trend emerging than the growth of electricity consumption and power generation. China this year will add 80GW of generation after adding 95GW in 2007. India's entire electric capacity is a mere 135GW, leaving the country roughly 17% deficient during peak hours. India will need to build out 80GW of generation by 2012 just to break even. News emerged this month that South Africa is experiencing severe power shortages and Vietnam is struggling with brown outs.
Outside of emerging markets, developed countries, too, are building out new power generation in the form of wind, solar, and fuel cell technologies. Korea Electric Power, which imported 17% of its coal from China last year, is scrambling for alternative sources after China announced an end to coal exports last month (Suntech Power just opened its first office in Korea this month and a KEPCO subsidiary has been buying fuel cells from Fuel Cell Technology for the last 6 months). Leave Asia, take a drive through Scandinavia, and you'll see the consistent build out of new wind farms, both on land and off-shore.
The bottom line is this: Emerging markets are building out electricity grids on a scale never before witnessed and developing markets are making the shift to alternative forms of energy. The facilitator of this mega-trend is: Copper. In regards to wind and solar energy, each requires 5-10 times the amount of copper as a traditional coal-fired plant. The data is not concise, but annual copper consumption ranges somewhere between 26 billion lbs. to 35 billion lbs. If we take the low end of 26 billion lbs. and factor 3% growth, copper miners need to increase production 780 million lbs a year to keep pace with global GDP. If you speak to leaders within the industry, they'll tell you there are no mines coming online now or in the future that can meet this demand.
Enter Taseko Mines (TGB). Taseko is a copper mining company in the sweet spot of this mega-trend. Having literally turned the lights on at their moth-balled Gibraltar mine back in 2003, they have consistently produced about 50 million lbs. of copper a year, while generating cash flow and profits each quarter.
At the same time they have enhanced their reserves to create a mine with a 16-18 year mine life-span producing 120 million lbs. a year. The mine's concentrator expansion is nearly complete and production for calendar year '08 is expected to be in the range of 80-90 million lbs. Calendar year '09 production is expected to be 110 million lbs. before leveling off at 120 million lbs.
What's remarkable is that the growth in reserves and production has been funded by cash flow. Taseko has no debt, over $80 million in working capital and trades at 10x trailing earnings. If you believe the macro copper story, then $3 copper is here to stay. At $3 copper (currently $3.60), TGB will earn roughly $0.85 in calendar year '08 and $1.17 in calendar year '09, leaving the stock trading at just 4.5 x and 3.2 x respective forward earnings.
Last week's earnings showed TGB was on track to hit its targets and production is ramping up. Copper plus production growth at this price puts TGB in the sweet spot of this mega-trend.
Disclosure: Long TGB
